The enormous growth of OTC derivatives contributed to tightening the links among financial institutions, making contagion more likely in case of failure of one of these institutions. Given the high market concentration in some of the OTC derivative space like FX, the risks that OTC derivatives pose to financial stability are therefore exacerbated. The opacity of OTC derivative markets amplifies the risk because activities of financial institutions cannot be fully observed by regulators and other market participants. There is a need to move these products to a more regulated and transparent, centrally cleared Exchange traded mechanism. Hence ensuring efficient, safe and sound Exchange Traded derivatives will be one of the main tasks of regulators. Safeguarding financial stability might come at a cost in terms of market efficiency, but measures for increasing safety can also improve market efficiency.
How about hearing this out from the experts? Catch the thought leaders speak on this and much more on 16th January 2010 at “Future of Financial Market Summit” at Goa.